February 28, 2025 l Business World
Our economic managers, including Finance Secretary Ralph G. Recto and National Economic and Development Authority (NEDA) Secretary Arsenio Balisacan, have set a goal for the Philippines to become an upper middle-income country this year, even though we have been classified as a lower middle-income country since 1987. The World Bank established this classification based on a country’s gross national Income (GNI) per capita reaching $4,516. While it is an excellent sign that the Philippine economy is growing, the downside to attaining upper middle-income status is the loss of perks such as access to preferential interest rates on official development assistance loans from multilateral banks and donor nations. These loans accounted for 14.5% of our national debt in 2023. While interest rates on national debt might go up, in the long run, this should be offset by improved foreign investment due to our upper middle-income status and recent developments such as the Philippines’ removal from the grey list of the Financial Action Task Force (FATF) and the implementation of the CREATE MORE Act.
We tend to hear of economic growth in terms of gross domestic product (GDP) per capita. However, there are slight differences in how GDP and GNI are calculated. In the Philippines, our GNI is slightly higher than GDP as the Bangko Sentral ng Pilipinas (BSP) adds net primary income from the rest of the world. For purposes of our economic managers, GDP growth is more within their control, and the question, therefore, is how can Philippine GDP grow sufficiently for us to achieve our upper middle-income country aspirations, especially as we have fallen short of government targets over the last two years?
One reason investors are optimistic about the Philippines’ economic fundamentals is the so-called “demographic dividend,” thanks to our young, growing population, which is anticipated to boost consumption spending in the coming decades. This contrasts with other nations that face the fiscal burden of supporting aging populations. As I have noted in previous columns, this young population must be equipped for the workforce through proper education and training to fully benefit from the demographic dividend. Consumption spending last year was also hindered by high inflation that raised the cost of essential goods, although food inflation in 2024 was 4.5% compared with 8% in 2023. To promote further consumption this year, the government should focus on controlling inflation, especially food inflation, so our fellow countrymen can afford to eat.
Businesses are investing in growth projects amid a more favorable macroeconomic outlook. However, this is tempered by volatile global risks, including the potential impact of trade wars stemming from US threats to sanction trading partners to boost its competitiveness. Foreign companies are increasingly eyeing the Philippines, with the Philippine Economic Zone Authority (PEZA) approving almost P53 billion worth of investment pledges in the first two months of the year, more than quadruple the amount from a year earlier. These investments are expected to create more than 11,000 jobs, leading to increased consumption. We must ensure these pledges materialize. Additionally, the recent cut on the reserve ratio requirement (RRR) by the BSP is anticipated to add P330 billion in liquidity and hopefully contribute to lower interest rates, further encouraging investment.
In 2024, the state expenditure-to-GDP ratio was 24.32%, highlighting the impact of government spending on economic growth. Beyond the actual spending, the funds have to be allocated to areas that will strengthen our economy in the long run, such as President Marcos’ priority projects. This emphasizes the importance of agencies such as the Department of Budget and Management in developing a national budget that will suit the needs of our nation, including investing in social services and infrastructure development. Consequently, funds that are diverted from allocated government spending to individual pockets hinder our economic growth, as does increased debt service costs resulting from borrowing to fund projects.
The challenge before us is vast, but the business community stands with the government in our efforts to achieve high middle-income country status and beyond.
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email eaquahiansen@phinma.com.ph. Photo is from Pinterest.